CASE 1

Latvia has become the second European Union country to seek the International Monetary
Fund (IMF) help to stabilize its financial system. It is also asking for help from the European
Union. The Latvian Prime Minister said the sum of needed would be decided by talks with
the IMF and EU. Latvia has fallen into recession and recently nationalized the country’s
second largest bank. The government invested $353M into the PAREX bank to help it
survive after run on its deposits. It also offered $877M in guarantees to its creditors.
Latvia’s economy, which grew by 50% between 2004 & 2007, shrank to 4.2% in the third
quarter of the year, the sharpest economic contraction in the European Union. The Latvian
Government has already started talks with the European Commission, the executive branch
of the EU, on a possible rescue package for its economy. The IMF has said it has $200 billion
set aside to help out countries facing turmoil because of the current global financial crisis.
It has also said it expects to provide help for some 24 countries.
1) What measures can the European Union take in order to undo the economic contraction?
2) What is the role of IMF towards the countries that have fallen into recession?
3) In what ways can Latvia use the financial aid from IMF to stabilize its financial system>
4) Explain briefly the term Economic Recession in detail.
LATVIA
1)

 In total of EUR 7.5 billion that

were committed by the EU, IMF
and Nordick countries (Sweden,
Denmark, Finland, Norway &
Estonia) and other countries, I
think their help is such a big
help to Latvian country in order
for it to undo the economic
contraction, using it to stabilize
the country and continue its
growth.
2)
 Since International Monetary Fund’s (IMF) mission is to watch over the monetary system,
guarantee exchange rate stability and eliminate restrictions that prevent or slow trade, when an
economy is under a recession or depression IMF role is to help it with its economic difficulties like:
The IMF does serve a very useful role in the world economy. Through the use of lending,
surveillance and technical assistance, it can play a vital role in helping identify potential problems
and being able to help countries to contribute to the global economy.

Lending Surveillance Technical Assistance

IMF helps countries to administer

When a country requests a loan,
the IMF will give the country the
money needed to rebuild or
stabilize its currency, re-establish
economic growth and continue
buying imports.
Reports point out problems and
potential risks to the world
economy and financial markets.
their economic and financial affairs. It
can perform useful surveillance and
lending to help the country avoid
economic pitfalls which creates
sustainable economic growth. It helps
countries strengthen their economic
policy, tax policy, monetary policy,
exchange rate system and
financial system stability.
3
)

The Latvian country used the

financial aid from the
International Monetary Fund
(IMF) to stabilize it’s country.
They put it in the bank for the
increase of the investments, they
used it to decrease the
unemployment and to lower the
4)

Economic Recession is
when the economy becomes
less active. It starts when two
quarters in a row when gross
domestic product goes down.
The results are:

• Prices for goods go down.

• People lose their jobs so
unemployment increases.
• Inflation and interest rates
go down.
• Many company shares lose
value.
• One definition is that two
quarters in a row when
gross domestic product goes
down is the start of a
CASE 2
Mexico experienced large-scale trade deficits, depletion of foreign
reserve holdings and a major currency devaluation in December
1994, followed by the decision to freely float the peso. These events
also bought about severe recession and higher unemployment in
Mexico. Since the devaluation, however, the trade balance has
improved.

1) What where the economic indicators, such as the balance of

payments, the exchange rate, and foreign reserve holdings,
during the period 1994?
2) What caused Mexico’s Balance of Payment difficulties prior to
their currency devaluation?
3) What policies could have prevented the Balance of Payments
problem prior to the collapse of the Mexican peso?
4) What lessons can be derived from crisis so that a developing
country like the Philippines could prevent it from happening.
MEXICO
1)
Inflation rate on a 12-
Gross Domestic Product Nominal rate dropped from month basis climbed to
(GDP) of 1.4% to 7.4% 8% to 4% 52% reached a level of
71.5%

15% devaluation of the Stock prices collapsed and 70% of foreign holdings was
national currency the peso interest rates increased dollar denominated
sharply

 The economic history of Mexico is marked by the severe recession as is show above. The recession
deepened even further following the 15% devaluation of the national currency, the peso on
December 20th. By the end of December the peso had fallen by 30%, stock prices collapsed and
interest rates increased sharply. As a consequence of this crisis, GDP fell by 1,4% to 7.4% which led
the investors to just keep their money on pocket or at home, the rate of inflation on a 12- month
basis climbed to 52% in December 1995 and short-term interest rates1 reached a level of 71.5% in
April 1995
2)

 Because of the floating of the peso,

the value fell against USD as much as
40%, which led to the decision of
Mexican Government to devaluate the
peso against dollar to 14%. The
devaluation of peso gives reason to
investors confidence to decline or pull
out shares which gives problems to the
Balance of Payments of Mexico.
3)

The Balance of Payments could have been prevented

if:
• The government provide a dollar liquidity to the banks
• Adjust the exchange rate depreciation
• Adjustment through capital movements

 Because everything varies and nothing is constant.

When capital movement is perfectly mobile within
country, a small rise in the domestic rate of interest
brings a large inflow of capital.
4)

The lessons in Mexico’s crisis

which can help developing
countries like Philippines is
the country should have a
strong prudential supervision
of banking system for
prevention of financial crisis,
they should focus on
exchange rate because it
varies which is a big impact
to economy of country.
CASE 3
After the global recession between 2007 and 2008, it was discovered that
Greece’s finances were much worse than initially reported and the country
would need extensive financial assistance in order to remain solvent and
retain the single currency. Since 2009, Greece has experienced prolonged
period of recession, the demands of Greece’s creditors in return for
financial assistance have led to severe austerity, resulting in the reduction
of relative salaries, loss of thousands of jobs and spending cuts to public
services.

1) What set of events or indicators lead to the Greek financial crisis? What
were the actions that the EU and the IMF created to stabilize the
economy?

1. As compared to other countries with the trade deficits, Japan seems to

be one of the countries with consistent trade surplus. What could be the
factors that led Japan to have continuous trade surplus? Is it harmful for
Japans economy?
2. What are the official reserve assets? Why it is important for the smooth
flow of capital funds in international trade and finance?
GREECE
1)

The Greece’s budget deficit exceeded 15 percent

of it’s Gross Domestic Product (GDP). Greece
borrowed much more money that it was able to
make a revenue through taxes the country was
sky high deficit and was frozen out of bond
markets. Greece received a help from the EU
$330 billion to help the country stabilize its
economy.
1.

 Japan’s economy is continuously growing

because of it’s trade surplus. For the
country , International trade is the lifeblood
of its economy which leads the country to be
a fast growing country and is the fourth
largest trading nation in the world.
2.

Official reserve assets include currency, commodities, or other

financial fund by monetary authorities, such as central banks.
It is important because it helps to finance trade imbalances,
check the impact of foreign exchange fluctuations and address
other issues under the policies of central bank for the smooth
flow of funds.